BRANCACCIO: Welcome to NOW, we're on the road in Santa Rosa, California.
See those houses behind me? Look closely and you can just about see their prices rise. Like a lot of spots in the USA real estate prices are growing like irradiated cucumbers. In this California county they rose about 20% last year alone.
That boom is being driven in part by a tidal wave of cheap money — lenders are offering interest-only mortgages at incredibly low rates. The tiny payments on these loans often entice buyers into buying more house than they probably ever thought they could afford. But watch out when the true costs kick in. Costs that we all could get stuck with.
William Brangham produced our report.
When you hear talk about the 'housing boom', you think houses, right? Construction sites...sheetrock. Maybe you ought to be thinking about this guy.
Meet 'Mr. Real Estate Boom' himself. Just five years ago, Chris Nuñez was working the register at a grocery store. But now, this son of migrant workers is pulling down six figures as a real-estate agent in Northern California. He owns three homes worth a couple of million dollars.
CHRIS NUÑEZ:
This house I purchased about, probably about a year and a half ago, and I paid about 430 for it, and it's worth about 670 right now. The other house I purchased, I purchased that one for 470, and it's worth about 779.
BRANCACCIO:
For his own home, he purchased this house for a million dollars in one of Santa Rosa's swankiest developments.
In just ten months, he says its value has jumped almost a quarter of a million dollars.
CHRIS NUÑEZ:
It's still a little surreal here when I come out here and hang out. I just, I think a lot of times, how did I pull it off? And, it amazes me still.
BRANCACCIO: This isn't some 'Get-Rich-With-Real-Estate' infomercial. Chris Nuñez' fortunes are important because he and millions of other Americans are betting big time that interest rates stay low and the housing market stays hot.
It's estimated that the housing and construction boom is responsible for nearly 90% of America's recent economic growth. So it's a gamble that could effect us all.
In California, the red-hot market has been fueled in part by what are known as 'interest-only mortgages.' These mortgages are all the rage. A few years ago, almost nobody here used them, but now, a whopping 60% of home buyers are going the interest-only route.
They've made homeowners out of many, but the rapid growth of these mortgages also has a lot of economists worried. Are they a fabulous financing tool, or are they symptoms of a market that's just about to blow?
CHRISTOPHER THORNBERG:
You can get in and out of this market, and make money. Just like you can get in and out of a pyramid scheme and make money. But it's, again, it's like a game of musical chairs. When the music stops, is there gonna be a chair for you?
BRANCACCIO:
If it is a game of musical chairs, Chris Nuñez has great timing. He entered the real estate business just as northern California's growing Latino population was increasingly turning to real estate.
CHRIS NUÑEZ:
You know I usually I get clients who come in here assuming that I came from a wealthy family or I am highly educated or whatever. I usually say you know what, I'm just like you guys. I eat beans like you in the morning.
BRANCACCIO:
In his first year, his sales prowess earned him the 'rookie of the year' award. He's been a top earner for his company ever since.
CHRIS NUÑEZ:
When I first started I made a flyer. And what I did, is I went to the churches and while they were at church, I put these on the windshields. And I would get a call from them and they would say, "You know, I was thinking about buying a house. And there was a flyer on my windshield. It was a sign from God."
DAVID BRANCACCIO:
A sign from God…that Chris the real estate agent was ready for their business.
CHRIS NUÑEZ:
Correct.
BRANCACCIO:
Here in the wine country north of San Francisco, some higher power seems to have been blessing the real estate market.
Home sales have been blazing. Developments with streets like 'Pinot Noir Way" and "Sauvingnon Place" keep popping up. Homes are appreciating at rates that're almost freakish - 20% last year alone. It's driven the median price of a house here to nearly $600,000 — triple the national rate.
CHRIS THORNBERG:
What happens is, is people say "Gee, housing prices went up by five or ten percent last year. I gotta get into the market! This is a great place to make money!" So, a bunch of people run into the market trying to buy houses. And lo and behold, the prices go up, thus fulfilling their expectations and causing more people to turn around and go, "Hey, I gotta get into this market!" And they go rush into the market, thus causing the prices to go up yet again. You see how this works it becomes a cycle.
BRANCACCIO:
This rapid spike in prices is partly why interest-only mortgages are so popular. By paying just the interest on a mortgage, a buyer can initially shrink their monthly payments a lot. Paying down the principal on your house is just so old-fashioned these days. These cheaper payments let buyers stretch their money and get into those more expensive homes.
CHRIS NUÑEZ:
I'm going to meet a client. I have never met him before. He was referred to me by another person,
BRANCACCIO:
Not only does Chris Nuñez have two interest-only mortgages on his properties, he also encourages many of his clients to use them as well.
Today, he's off to meet a potential buyer who's said he can only spend about $500,000 on a house. Nuñez thinks a little pep talk about interest-only loans will help bump that number up a little bit.
CHRIS NUÑEZ:
I think once I get there and I educate him about the five year interest only loan. I know I can get him up to about 630, 640 or even any higher. Once I show him houses, they fall in love, and I know they'll do it.
BRANCACCIO:
Nuñez says he's not trying to boost his commissions, though getting a client to pay more money certainly does that. He says he loves these loans because they help clients get into a market that otherwise might pass them by.
CHRIS NUÑEZ:
I love this business. I meet people who think they can never own a home. And once I educate them and let them know they can, it, it's great.
BRANCACCIO: Today, his client falls in love and wants to make an offer. Before he's even stepped off the property, Chris is on the phone, fixing up an appointment with a mortgage broker.
CHRIS (on phone):
When can you see him? Today?
MAN:
Hello, si, Israel Fernandez.
CHRIS NUÑEZ:
He wants this house so I need to set him up with a lender right away. And so I'm sending him over right now because I can't make an offer on the house until he's pre approved.
CHRIS NUÑEZ:
How are you doing? Are you the homeowner? Well we just previewed your house. Looks really nice. I'm going to sell it. I'm not kidding. You'll probably have an offer by tomorrow.
BRANCACCIO:
Across town, the Carnes family has also been turned onto an 'interest-only' loan, once again by Chris Nuñez.
CHAUNDRA CARNES:
We ended up meeting Chris at a party. And everything he said just made sense to us. It was like we could get more home even, you know, even more home. Or in the neighborhood we really wanted with the school districts we really wanted. And so he kinda just got our juices flowing and we started looking.
BRANCACCIO: When they saw this house there was a lot to like. The $950,000 price tag felt daunting, but they really wanted it — that commanding view of the hills was too good to pass up. So an interest-only loan was their ticket in.
Michael runs production at a winery and Chaundra manages the office at an auto body shop. Together, they earn just over $100,000 a year.
Back in the days when 30 year fixed rate mortgages were the norm, the Carnes would've been advised to borrow about twice their annual salary - around $200,000. In this market, that old ratio of salary to loan seems positively quaint: the Carnes have borrowed $700,000 — seven times their yearly income.
CHAUNDRA CARNES:
To have a 30 year loan almost seems like you're giving away too much of your money. If you have to take a loan out anyway, why not borrow the most you can borrow. You know if it helps you get the home that you really want to live in.
MICHAEL CARNES:
With the value increasing the way, at the rate it is, why not get an interest-only loan to free up more spendable cash per month? And so we ran the numbers. And the guy says, "Yeah, it looks good." And we couldn't believe him. And so we did it. And here we are. And we're really happy.
And like I said, we just barely made it. They told us that.
BRANCACCIO: Here's how their loan works: the 'interest-only' payment on the mortgage costs them $3200 a month. The Carnes' say making that payment every month is pretty tight, but for now, manageable. By not paying down any of their principal, the Carnes payment is about $800 cheaper than a traditional mortgage.
But unlike traditional fixed rate mortgages where your payments are locked in and steady for the duration of the loan, interest-only loans only stay low for a little while.
After a set amount of time — usually 3 or 5 years — a couple of potentially troubling things can happen: first, you've got to start paying back the principal on top of the interest. And second, your interest rate will adjust.
ALLEN FISHBEIN:
The monthly payments for these loans, while they may start out a little lower than the standard fixed rate mortgage, can be expected to increase fairly substantially three, five years down the line. And many consumers may not be in a position to afford those higher monthly payments when that occurs.
BRANCACCIO: Allen Fishbein is the Director of Housing and Credit Policy at the Consumer Federation of America. He did a survey of people who'd bought interest-only loans and found that a majority seriously misunderstood just how big their monthly payments could get. He's worried that millions of financially stretched consumers will have a grim day of reckoning if interest rates keep going up.
ALLEN FISHBEIN:
The prospects for higher monthly payments that can be 50 percent higher than your initial payment or more are very great, are very real and something that consumers need to take account in their financial planning.
BRANCACCIO:
Fishbein's not the only one concerned: in a recent story about the surge of these loans, an advisor at a credit counseling service in Northern California said quote "We currently are preparing ourselves for an onslaught of defaults."
DAVID BRANCACCIO:
Do you ever worry that you're talking people into homes that they ultimately can't handle? I mean, is there a danger that people come to you, you're a wonderful salesman, you're persuasive. But that they might be biting off more than they can chew?
CHRIS NUÑEZ:
No. Not at all because they wouldn't have qualified for the loan. So they can actually handle the payments, you know? Whether it's a five year or a 30 year loan, they have to qualify first.
BRANCACCIO:
But there's been a lot of concern recently about just who gets qualified for home loans. Federal regulators are uneasy that many lenders are loosening their standards. They're worried this wave of new mortgages exposes both lenders, and borrowers, to way too much risk.
ALLEN FISHBEIN:
In the past, borrowers could depend on lenders probably to turn them down for loans that they didn't think are appropriate. Today's market, it seems like more and more lenders are willing to make a loan to virtually anyone who walks in the door as long as they're living and breathing and have some kind of credit history.
BARNEY ALDRIDGE:
We have various people coordinating the home loan process here.
BRANCACCIO: Remember when you used to have to dress up in a shirt and tie and schlep down to the bank in person and beg for a mortgage? Welcome to the world of mortgages, 2005 style.
Barney Aldridge is the founder and CEO of Benchmark Lending group — one of Northern California's fast-growing mortgage companies. No necktie necessary. You don't even have to show up in person: Benchmark sells and arranges almost all their mortgages over the phone.
BARNEY ALDRIDGE:
Typically people would hear the ad when they're driving home from work and they'll call in.
BRANCACCIO: Aldridge says this talk about lowered lending standards is bogus - he says his company offers new and creative loans because they give consumers what they want: that is, a shot at being a homeowner.
BARNEY ALDRIDGE, BENCHMARK LENDING GROUP, INC:
I know of some customers that've been renters who watched a home go from $275,000, quickly to $375,000, quickly to $475,000, we're talking over a two to three year period.
It allows people to kind of hang on to that balloon string of the housing market without being left on the ground. And I'm not sure if there's anything worse than being a renter for the rest of your life and never having an opportunity to get into a house.
BRANCACCIO:
Aldridge says his sales people work hard to make sure that customers are matched only to loans they can handle. But critics point out that most mortgage companies, Benchmark included, sell off their mortgages after they're booked and so have little stake in the long term health of those loans.
SALESMAN:
We hope to get that money in your hands.
BRANCACCIO:
And there's a pretty clear go-go attitude out on the sales floor. This is a volume business, don't forget. Agents are grouped into teams of eight to twelve individuals. They compete against each other, and prizes like paid-trips and concert tickets are given to the team that sells the most.
DAVID BRANCACCIO:
If you're on the phone with someone who's interested in a loan like that, some of them have to ask 'Am I setting myself up for failure if the interest rate, you know, pops on me in a couple of years if I'm already stretched in the early years?' What do you say to them?
BARNEY ALDRIDGE:
I think, I think every situation is different and I would look at what somebody's game plan is going into the loan. If they have no plans for more income in the future, then this definitely wouldn't be the loan for them, or a loan I'd recommend for them. Other people may say I need a home now for two or three years and I'm going to sell it.
DAVID BRANCACCIO:
Do you worry sometimes people get a little too optimistic about their own situations? Because it's very easy to envision prosperity, it's sometimes hard for us to envision 'what if it doesn't work out for us.'
BARNEY ALDRIDGE:
I think you always have to be clear on a worst case scenario, you know?
BRANCACCIO: To economists like UCLA's Christopher Thornberg, the whole market in California is fast approaching a 'worst case scenario.'
Remember the late 80s in California when the last housing bubble burst and homeowners lost a jaw-dropping 150 billion dollars in equity? Thornburg argues the run up to that bubble is eerily similar to today: Home prices were rising by double-digits, and a rash of new-fangled mortgages were being used to get over stretched buyers into the market. Sound familiar?
CHRISTOPHER THORNBERG:
What you're seeing is a market that's really coming close to its last legs. It's running outta people entering the bottom of the pyramid, and therefore is resorting to crazier and crazier financial instruments to get these people in. These prices are out of whack with the fundamentals. And they simply aren't are not going to last. We're going to have to pay the piper on this.
BRANCACCIO:
But exactly when? For nervous homeowners, the varied reports of the market's imminent demise have to be jarring. Just this week, the National Association of Realtors declared that nationwide home sales had slowed, raising concerns the market had peaked. But then the very next day, the Commerce Department said home sales were at a new record high.
CHRISTOPHER THORNBURG:
You could get into the market now, you might be okay. You might make 10% over the next year. I'm not arguing that. This thing could pick up speed for one more time. It surprised me before. It wouldn't surprise me if it surprised me again, so to speak. But prices are overvalued. They're outta whack. And this has to end at some point in time. And just like any pyramid scheme, you get in early, you do great. You get in late, you get burned.
BRANCACCIO:
Michael and Chaundra Carnes have heard all the talk about the housing bubble. They think that whatever comes, they're going to be OK. And its pretty hard to argue with their personal experience in this market: this is their fourth home, and every one of them went up nicely in value. They'd buy low and sell high each time. They don't think this house will be any different.
MICHAEL CARNES:
In 10, 15 years, we'll have to be a little bit more conservative. But right now, we're living it up - have a house on a hill and we're very happy.
CHAUNDRA CARNES:
You know, the only risk is if housing values go down. And I guess that's a risk we're willing to take. And I think a lot of other people are too. So we're not alone.
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